Why The China Pessimists Will Be Proved Wrong

Shoppers from mainland China get it on in Hong Kong. REUTERS/Bobby Yip China's 7.4% growth in GDP is the weakest full-year growth rate in more than two decades, and the government's official growth target last year is missed. But don't expect an overreaction from the government to boost economic growth in 2015.

The deceleration of economic growth has been accepted in China as the new normal, and it appears that there is a high level of tolerance for slower growth in 2015. China has also been sending strong messages lately that the rebalancing of the world's second-largest economy will take place in a measured and sustainable way - and, as far as one can see, China is taking careful steps to recalibrate the economy and avert a sharper slowdown in growth.

There is little doubt that the Chinese economy is set for a bumpy ride in 2015. But is it set for a hard landing? No. If we learn from recent history of the management of economic growth in China, the pessimists are once again going to be proved wrong.

Don't panic

The last time the Chinese economic recorded lower growth rate was in 1990 when it grew by 3.8%. But the new GDP figures have to be interpreted with caution. To put the new GDP figures in perspective, 7.4 is still a relatively healthy growth in the current global economic climate. The Chinese economy remains resilient. As any economist would argue, recalibrating any economy, let alone the second largest economy in the world, often comes with a price tag - slower economic growth.

Looking forward to 2015

Sustainable quality growth is the watchword for 2015. There is a near consensus that China's economic growth will cool further in 2015. Some analysts are predicting a growth target of about 7.3% this year, but many think the official growth target is more likely to be pegged around an achievable target of 7%. The International Monetary Fund has predicted a growth rate of 6.8%.

There are many reasons for this prediction. The 2014 figures are yet another indicator pointing towards a tamed economic growth in 2015. 2014 was a year of tepid export growth and weaker-than-expected consumer growth and there are no apparent reasons to believe that they are not likely to last well into 2015.

Meanwhile, in the midst of gloomy predictions, the recent free-fall of oil prices is great news for China as the largest net importer of oil. Rock bottom oil prices are expected to lead to lower costs for both businesses and consumers thereby stimulating economic growth in 2015.

But what if … ?

The thing to watch out for in 2015 is the extent to which the measures being taken to stimulate export and consumer demand brings about the desired effects.

If the anticipated reforms - including the expected further cut in the benchmark lending rate and the likely lowering of requirement ratios reserve by the People's Bank of China - do not work as well as projected, then perhaps unattractive measures may have to be considered to stop growth from sliding further.

There is no way of knowing, for instance, how consumers - one of the main driving forces of the economy - are going to react to lower interest rates.